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Mortgage Guide
Types of mortgages
There are many different types of mortgage available so it pays to shop around for the best deals.
Watch out for the fees that you will be charged for setting up the mortgage and any early redemption charges that may be payable if you repay your mortgage early.
There are four main types of mortgage available
Fixed Rate Mortgage
Fixed interest rate mortgage for the first few years, however once this time period expires, your monthly mortgage repayments return to the lenders standard variable rate. This means you can budget accurately during the first years without having to worry about a sudden increase in your monthly motgage payments.
Variable Rate Mortgage
The mortgage repayments fluctuate with the lenders standard variable interest rate often resulting in paying more than you would with other mortgage types.
Capped Rate Mortgage
This allows you to know the maximum monthly mortgage repayment that you will have to pay, and repayments will fall if interest rates drop.
Discounted Rate Mortgage
These have a fixed period over which the mortgage rates are reduced, which helps keep morgage repayments low in the early years of the loan.
There are three main ways of repaying your mortgage:
Repayment Mortgage
This is the most popular means of mortgage, you repay your mortgage over a set period of time. For the first few years of the mortgage most of your monthly mortgage repayment is the interest on the loan and only a small amount is repaying any capital. After some time, depending on how much you pay each month, you repay more capital and less mortgage interest. You are guaranteed to pay off the mortgage, assuming that you make all the mortgage repayments are made.
Interest Only Mortgage
Here the borrower only repays the mortgage interest on the loan each month, meaning the debt remains fixed. The borrower also takes out a saving scheme to build up a lump sum and eventually repay the mortgage. There are three main types of saving scheme:
Endowment Policy Mortgage
You pay cash into an endowment policy, obtained from an Insurance company or independent financial advisor (IFA), throughout the mortgage term.
ISA Mortgage
An Individual Savings Account mortgage that can be sorted out through banks, building societies, insurance companies or from and IFA. In this case the savings are paid into an ISA and this money is invested on the borrower's behalf.
Pension Mortgage:
Here the savings scheme is a personal pension. Like the ISA these can be obtained from banks, building societies, insurance companies or via an IFA. Money paid into the pension is invested on the borrower's behalf to eventually pay back the mortgage.
You can also have an interest only mortgage without a savings plan however this is unusual and you would need to be able to prove that you were expecting a lump sum of cash to repay the mortgage debt.
Other Mortgages
As if all the above choices were not enough, there are also new mortgages that have recently been introduced, these include flexible mortgages, current account mortgages and offset mortgages. Many of these mortgages may save you money over the lifetime of the loan.
Redemption penalties
Fixed, variable and discounted rate mortgages often have a penalty if you stop the mortgage early. This could be as much as the equivalent of six months mortgage interest payments. Always ask about redemption payments when applying for a mortgage and carefully read all the small print.
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